M&A Alert - November 9, 2009
Electronic Arts Agrees to Acquire Playfish
Transaction Overview
On November 9, 2009, Electronic Arts (NASDAQ: ERTS) agreed to acquire Playfish for up to $400mm.
Target Description
Playfish develops games that allow multiple players to play with or against each other. Playfish games are largely distributed via social networking sites and can be played both online and on mobile devices. Playfish games are free but encourage users to purchase virtual goods such as better weapons or clothing as a way to upgrade the experience for the player. As of November 2009, Playfish games have been installed by more than 150mm users and are being actively used by 60mm users on social media platforms such as Facebook, MySpace, Google, Bebo, iPhone and Android. Playfish games are amongst the most acclaimed and popular online, including Pet Society, Restaurant City, Country Story and Who Has the Biggest Brain? Direct competitors include Zynga and Playdom. Since inception, Playfish had received $20mm funding from Accel Partners (Partner: Kevin Comolli) and Index Ventures (Partner: Ben Holmes). Playfish was founded in 2007 and is headquartered in London.
Buyer Description
EA Interactive (EAi) is a division of Electronics Arts (EA) and houses EA Mobile, Pogo and social gaming. Pogo is the #1 casual game web destination in North America and Europe. EA Mobile is the world’s #1 mobile games publisher with 34% market share in the U.S. EAi’s games include as Rock Band(R), Madden NFL10, The Sims(TM), and Tetris(R). Barry Cottle, SVP/GM of EAi was the key executive sponsor of the transaction.
Transaction Parameters
Playfish’s revenues are derived from two sources, 1) customer lead generation (companies marketing their products and services to players) and 2) selling virtual goods, as mentioned above, directly to players. Playfish’s revenue is reported to be approximately
$75mm, of which the majority are derived from virtual goods sales. The up to $400mm purchase price is comprised of a) $275mm in cash payable upon close, b) a $25mm equity–based employee retention plan and c) and up to $100mm earnout that is contingent upon performance milestones throughout December 31, 2011.
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| Minimum Value of Consideration: | $300mm |
| Maximum Value of Consideration: | 400mm |
| Equity Value / Revenue Multiple: | |
| Minimum Consideration1 | 4.0x |
| Maximum Consideration1 | 5.3x |
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1) Net Revenue Multiple is based on reported gross revenue of $75mm (source: TechCrunch)
Strategic Rationale
Playfish adds an important social game element to EA’s digital gaming portfolio. Social media networks such as Facebook and MySpace have become important platforms to offer games suited to engaging users in a social context. Digital gaming represents an important growth area for EA, versus traditional console gaming. In Fiscal Q2 2009, digital gaming revenue enjoyed a 23% increase from the prior year versus overall gaming that shows 12% decrease over the previous year. Playfish continues EA’s legacy of targeted acquisitions such as JamDat, a mobile gaming company which it acquired in 2005 (10.2 revenue multiple) and pogo.com, an on line casual gaming company, which it acquired in 2001.
Architect Partners’ Observations
Digital gaming has shown strong growth given the emergence of smartphones and the increasingly popular social networks. As highlighted by VentureBeat, unlike traditional console gaming, which requires higher development costs, digital gaming is faster and simpler to create, and also offers a fresh revenue stream via advertising and the sale of virtual goods. Playfish allows Electronic Arts to capitalize on this new-growth opportunity, bolstering its competition against its peers which include UbiSoft (which recently launched UbiFriends that allows users to play games on Facebook) and Activision Blizzard, (which launched Guitar Hero on Facebook). However, social gaming has not been without controversy. As well documented by Michael Arrington of TechCrunch, the advertisements integrated in social games are at times misleading and unethical, therefore casting doubt on social gaming’s revenue sustainability. In some cases, users are not properly informed of the cost of the advertised products or services being offered. This was a major problem in the mobile content world a few years ago which left a lasting stain on the sector. We hope, and expect, that this behavior will quickly be snubbed. Early signs are encouraging.